Good evening cheapskates! We kick this investing article off a little differently. Today’s article isn’t about stocks or equities. Nope, in fact today we’re talking about savings! Boring old savings.
As always, the following is not financial advice, read our disclaimer
But don’t savings accounts provide poor returns?
You’re absolutely right. Ordinarily, we’re very much against locking your free cash up in regular savings account or even cash ISAs. After all, the very best savings rate we could find of any UK savings account from a traditional provider was a whopping 0.5% (provided by Virgin Money, flexible saver, though this rate is variable and interest is paid quarterly. Believe it or not this is actually pretty good for a UK saving account right now!). The reason we would never put our cash into those accounts is because the rate of return they provide is LESS than the average rate of inflation or 2-3%. In real terms, if you lock your cash into a regular savings account, then your money is LOSING value every year to the tune of -1.5 to -2.5% minimum. Yikes.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”– Robert G. Allen
Enter the crypto exchanges.
Unless you’ve been hiding under a rock, you’ve more than likely heard about cryptocurrencies and Bitcoin, perhaps even some of the other well known crypto currencies like Ethereum or XRP. Don’t worry, this article isn’t about investing in cryptocurrencies, but it’s important to understand the effect cryptocurrencies have had on the economy over the past few years and specifically, the future of cash.
Cryptocurrencies are bought and sold on platforms called exchanges. A crypto currency exchange is exactly like a foreign currency exchange where you would go to change your home currency for the cash of the country you are visiting. Where you would usually exchange POUNDS for EUROS, likewise on a crypto currency exchange you can change POUNDS for BITCOIN, or any other crypto currency for that matter.
These exchanges have now become so big that they have started offering services of their own – and this is where it gets interesting. The crypto exchange we use (and is the biggest in the world by volume of transactions) is Binance. Binance are the world leaders in crypto currency exchanging and are fast becoming the go to place for all things cash related, including fiat currency (fiat currency is money backed by a government like the Pound, Euro, Dollar etc).
Binance offer a plethora of different options for earning money on your cash via their app or website; including trading crypto, P2P lending, staking (similar to mining for bitcoin and is to do with the validation of transactions), liquid swap (more on that in another article) and more. The one we are interested in however is SAVINGS.
Unmatched Savings on GBP
At time of writing, Binance are offering 5% APY on your GBP savings. That’s right. No catch, you don’t need to convert into any crypto currencies like some other exchanges, there’s no hidden fees, just straight up 5% per year on any GBP deposited into their EARN account (which is basically just savings). The terms are flexible so you can withdraw at any time. See HERE for Binance’s explanation on it. Don’t get us wrong, 5% isn’t going to set the world alight. Even through Binance, some of their other options will allow you to make considerably more than 5% on your cash and 5% is a lower return than we would like to see if we were going to use that money in the stock market. However, for a large company like Binance to offer 5% on cold hard GBP without any catch, especially when the banks are averaging 0.1% is pretty impressive in our book.
So how can they do it?
In simple terms, when you save your hard earned pounds (or dollars, or any other currency for that matter) in a Binance savings account, that money is added to the pool of cash that Binance have. Binance then use that cash to make even more money by offering other products, very much like how a bank does, and gives a portion of the profits to you, in the form of your savings interest.
Cool! But is my money safe?
Lets start with the good:
When you save with a traditional bank, your money is protected to the tune of £85,000 by the FSCS (financial services compensation scheme) should anything go wrong like the bank going bust etc. Unfortunately, an exchange like Binance doesn’t have this sort of protection and money isn’t guaranteed by any government. However, Binance realises this and does have its SAFU fund which is an emergency fund Binance allocates from it’s transaction fees to cover emergencies. Binance aren’t too clear what these ’emergencies’ might be, but we’re assuming this is a safeguard against hacking, potential collapse of their business streams etc. Binance doesn’t state how much this fund is worth, but its good to know they have a safety net there and are taking their customers funds seriously.
Talking about seriousness, Binance are industry leading when its comes to security. If you are storing your money in a digital only place, you want to be sure that your money is safe against hackers. The good news is, Binance are leading the way here too. Here’s what Binance had to say on it:
At Binance, we invest in the latest technologies that are used to maintain the integrity of each account and transaction. These technologies involve artificial intelligence (AI) solutions used in identity and facial recognition, as well as big data analytics solutions that monitor each and every movement made on the exchange in search of suspicious activity, and cyber forensic investigations that trace the roots for each attempted misdeed on the platform.
For a concrete example of this technology in action, consider what happened to John*:
John, who was holding 46 BTC in his Binance account, was a victim of a SIM swap attack. The hackers compromised John’s phone number, email, and two-factor authentication, and gained access to his Binance account. Before the attackers could successfully withdraw the funds, our system flagged the activity as unusual and the account was automatically frozen. This all happened before John realized an attack had been attempted and thwarted. By the time he reached out to Binance Customer Support, he was elated to find out from customer service representative Maxi* that we had kept his funds SAFU.
Not only that, savings accounts in Binance are classes as the lowest risk form of earning on the platform. The savings rate you have been quoted at time of depositing is guaranteed, no matter if the market goes down, rates change or if anything else happens. Binance can do this by liquidating other higher risk types of trading to guarantee your return (more on that in a future article).
So its all roses then?
Not quite. There are a few things you might want to consider before putting your life savings into a crypto savings account.
The first is hacking. Whilst Binance are leading the way in terms of account and asset security, hacking is a real threat…..and it’s happened before. in 2019, hackers stole more than $40m worth of Bitcoin from Binance accounts, in what is Binances largest security breach. It’s rare to see this level of breach from a well established exchange like Binance, but it can occur.
another factor to consider is – Binance offers a number of ways to save – each coming with tis own interest rate. Their flexible savings accounts offer the lowest, but still very decent rate. A flexible account means that you can withdraw your money at any time, great success! The bad news is that, interest (or APY) is calculated DAILY. This means that while Binance may offer you an estimated yearly interest rate of 5%, that rate is only guaranteed for that day. They could in theory drop the rate tomorrow, or 6 months from now. We have yet to see this happen, but it does. They do however offer locked savings accounts. These accounts force you to lock your cash away for a specific amount of time, usually 15, 30 , 60 or 90 days. As a reward for doing this, the interest rate offered is usually higher and of course your interest is protected for that period. The problem is – these savings accounts have a limit, so you need to be quick to get one! Also, we have yet to see this offered on a fiat currency (they are mainly offered on crypto coins and stable coins) but we will keep you posted with updates.
So what do we do?
For us, we see these accounts as a great hedge to run along side our more traditional investing. Even though there are some risks, we think the risks are low enough to warrant saving through these exchanges. Note though, we wouldn’t save all of our free cash in this way. We would still recommend keeping an emergency fund in your native currency in an easy to access account, plus we still wouldn’t recommend this store of cash over a good investment that would likely return more than 5% over the long run. However, if like us, you are holding more cash than usual right now because of the high stock market prices, we think this is something worth considering. At time of writing, we are holding 38% of our cash assets in Binance savings accounts.
Thanks for reading! Head on over to our investing section HERE to see what else we’re investing in.
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